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11/08/2009

Productivity and Unemployment--Posner

Becker is certainly right that growth in productivity is an important driver of economic growth. But we must consider the source of the growth in productivity in order to understand the conjunction in the last two quarters of rapidly rising productivity with rapidly rising unemployment.
If productivity growth is the result of technological innovation (and "technology" in this context need not be limited to engineering--it could include innovations in management, marketing, inventory control, and so forth), then the effect of greater productivity on economic growth will indeed be positive. But it is unlikely that the productivity spurts in the second and third quarters of this year have been due to innovation. More likely they have been due to old-fashioned cost cutting spurred not by technological advances but by economic distress. The only explanations I have seen offered for the productivity surge is cutting wages and working the workers harder. I have found no suggestion of any technological change that might be responsible for such a large, sudden surge in productivity. Facing declining demand and a frightened work force, a firm is under pressure to reduce its costs and it can do that in a variety of ways, including laying off workers, pushing its remaining workers to work harder, reducing wages and benefits, buying cheaper inputs, slowing delivery, paying its bills more slowly, and responding more slowly to customer complaints. Some cost reductions will not increase productivity, as they will be proportional to reductions in output. But others will, such as laying off the least productive workers, or reducing quality in ways that do not show up in statistics on productivity (as they should--a reduction in quality is a reduction in the value of output).
Productivity gains that are based merely on adaptations to temporarily depressed economic conditions will be lost when conditions improve. As labor markets tighten, a firm will perforce hire workers who are less productive than the workers it had retained in a slimmed-down workforce during the depression; and so productivity will decline.
The productivity gains in the last two quarters could actually signal pessimism about the pace of the recovery. There are costs to reorganizing one's business in order to adapt to a reduction in demand. The shorter the expected reduction, therefore, the less reorganizing a firm will do. Indeed, often during a recession or depression there is the phenomenon of "labor hoarding": if a restoration of normal demand is expected in the near future, a firm may be better off with a workforce larger than it needs to meet the current demand than it would be laying off workers and having to incur the expense of rehiring them, or hiring new workers, when the downturn ends. There has been less labor hoarding in the current downturn than in previous ones, and this may be because employers do not anticipate an early return to normal demand. Their pessimism would be consistent with predictions that unemployment will continue to rise for some months, and thereafter will decline only slowly. For with such a high rate of unemployment (and underemployment--10.2 percent and 17.5 percent at this writing, respectively), demand for goods and services is likely to remain at a low level.

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